SEC Does Not Act on 20 Percent of Wells Notices Issued

When the Securities and Exchange Commission (“SEC”) substantially completes an investigation into violations of the securities laws, it may issue what’s known as a “Wells notice” to targets, informing them that it intends to bring litigation, pending the Commission’s approval. The notice is named after John Wells, who once chaired a committee that recommended a procedure of this kind. When the Wells notice is received, the recipient can do nothing, or make a “Wells submission” offering explanations and defenses. The SEC will then proceed with a lawsuit, or not.

Recently the Wall Street Journal requested a report under the Freedom of Information Act that showed 20 percent of the Wells notices sent between September 2010 and September 2012 were not acted upon.

During this period, 159 of the 797 notices issued went nowhere, as the agency quietly closed the relative investigations without charging the individuals named. After issuing a Wells notice, the SEC has 180 days in which to proceed with an enforcement action, unless a formal extension is requested and granted. The number of aborted cases may seem excessive, but an SEC spokesperson said the numbers “confirm that when we invite [Wells] submissions, we carefully consider the evidence and the arguments presented to us.”

Former Chairman Mary Schapiro noted that the report shows that “the system is working. It’s exactly what the Wells notices are intended to do: to bring out someone’s best defense before a decision is made on whether to charge them.” Some observers found the number surprisingly high, considering the effort, time, and expense dedicated to a complex SEC investigation. But several SEC officials told the Journal that they believed fewer people were successfully avoiding charges than in earlier years, for which there are no similar records.

The message sent appears to be that individuals who receive Wells notices should seriously consider trying to persuade the agency not to go through with its contemplated enforcement action. Their chances of success may be better than they think.